Benefits to and obstacles for Joint Implementation projects

Benefits to and obstacles for Joint Implementation projects Oleksandr Filonenko Bonn, February 13 -14, 2007 Scientific Engineering Centre “BIOMASS” IETP NAS of Ukraine

Contents: • • Regulations for Ukrainian JI projects Formal limitations JI “cherries” Prospective JI projects from Ukraine Barriers Success Specific needs of Ukrainian carbon market Conclusions Scientific Engineering Centre “BIOMASS” IETP NAS of Ukraine

SEC “Biomass” • Scientific Engineering Centre “Biomass”– private engineering and consulting company, founded in 1998. • Staff: 25 employees; 6 possess Ph. D • Fields of competence: Ø Environmental and energy saving technologies Ø Kyoto protocol mechanisms • Renders following services: Ø Development of feasibility studies Ø Research and development works for biomass, LFG, RE projects Ø Development of JI projects: § JI project identification § Development of project documents (PIN, PDD, business plan, etc. ) • 10 persons can be involved in JI project development Scientific Engineering Centre “BIOMASS” IETP NAS of Ukraine

Our consulting experience • Identified: 40 JI projects • Developed 30 PINs • Developed 6 PDDs Field scope: • Communal sector: district heating, WWTPs, landfills • Agriculture and wood industry • Oil and gas • Industries • Power • Coal industry For buyers from: • Netherlands, Austria, Germany, Japan, Denmark Obtained: 1 Letter of Approval and 23 Letters of Endorsement Scientific Engineering Centre “BIOMASS” IETP NAS of Ukraine

Regulations for Ukrainian JI Projects • Kyoto protocol – ratified by Ukrainian Parliament on 4. 02. 2004 • National Action Plan for implementation of Kyoto protocol to UNFCCC – approved by the Prime-Minister’s Decree № 346 -р on 18. 08. 2005 • National coordinator for implementation of compliance actions to be undertaken by Ukraine before UNFCCC and Kyoto protocol – assigned by Presidential Decree #1239 on 12. 09. 2005 • The order of consideration, approval and implementation of JI projects – approved by Cabinet of Minister’s Decree № 206 on 22. 02. 2006 • Most Recent! Requirements to JI projects – approved by the Ministry of Environmental Protection of Ukraine and agreed with other involved Ministries on 2. 08. 2006 Scientific Engineering Centre “BIOMASS” IETP NAS of Ukraine

Formal technical limitations to JI projects National requirements: International requirements: • JI project provides at least • JI project provides from 50 000 (tо 2 000) t СО 2 e/year 20 000 t СО 2 e/year • Income from ERU sales must cover at least 10% of total project cost • ERU price must be at least 50% of the current price at EU ETS spot market if project’s IRR is equal or higher than the discount rate Scientific Engineering Centre “BIOMASS” Rationale: > if ERUs amount is less than 50 ths. t СО 2 e/yr - the transaction costs are relatively high; > if ERU amount is higher than 2 mio СО 2 e/yr – the risk of non-delivery is relatively high • The project is not linked to nuclear power plants construction or afforestation IETP NAS of Ukraine

JI “cherries” Projects that belong to this category: • Low investment cost at high returns on ERUs E. g. Landfill gas utilization/flaring projects • Than can be implemented fast (preferably before 2008) E. g. CHP projects, biomass management projects. Those that require short time for equipment manufacturing and installation • Projects that already have investors (or at least commitments from financial institutions) Scientific Engineering Centre “BIOMASS” IETP NAS of Ukraine

Renewables Biomass is most perspective among other renewables in Ukraine: 1. Landfill gas recovery Pros: relatively small investments/cheap fuel (LFG) Cons: limitation on amount of waste/technical risks 2. Utilization (combustion) of sunflower seed hulls Pros: waste problem solving/reduction of fuel expenses Cons: high cost of equipment/ash 3. Wood waste utilization Pros: waste problem solving/reduction of fuel expenses Cons: high cost of equipment/transportation/ash 4. Utilization of agricultural waste Pros: waste problem solving/reduction of fuel expenses Cons: transportation/ash Scientific Engineering Centre “BIOMASS” IETP NAS of Ukraine

Prospective JI projects from Ukraine • Replacement of primary fuels by lower carbon intensive fuels or biomass • Cogeneration (~30% fuel economy, and ~30% GHG emission reductions) • Energy efficiency (energy saving) in industry and communal sector • Capture of coal mine methane, biogas from landfills, farms, WWTPs (combustion or full utilization) • Heat generation or co-generation on solid biomass, MSW, etc. • Methane emission reductions at oil and gas production and transportation • Reduction of N 2 O emissions in chemical industry Scientific Engineering Centre “BIOMASS” IETP NAS of Ukraine

Barriers to JI projects • • • Internal barriers: General investment climate High interest rate on loans at local banks Difficulties in obtaining and expensiveness of bank guarantees Lack of credit history, weak financial state of many Ukrainian enterprises comparing to western companies Poor quality of energy and environmental monitoring Skepticism or lack of information regarding JI mechanism at company’s top management level Unpreparedness/unwillilngness to pay off transaction costs External barriers: Complicated requirements to JI projects that ignore Ukrainian market specifics Lack of “serious foreign buyers” that are not only purchasing ERUs, but also invest in JI projects Unfair framework conditions comparing to CDM mechanism Scientific Engineering Centre “BIOMASS” IETP NAS of Ukraine

Success • The process of issuing Letters of Endorsement and Approval for JI projects has moved forward, which makes Ukraine’s rating higher as a carbon market player • Qualified consulting services are available Scientific Engineering Centre “BIOMASS” IETP NAS of Ukraine

Specific needs of Ukrainian CO 2 market • Informational support Some market players are still not aware or have wrong impression of the opportunities • Softer requirements from international carbon buyers !Alternatives to bank guarantees for advance payments must be found, otherwise a big segment of Ukrainian carbon market will be lost • Carbon buyers and project investors in one person In order to curb the GHG emissions – somebody has to finance the project! • Transaction cost burden tends to be covered by Buyer At least until first success stories are spread, most Ukrainian companies will not be willing to cover transaction costs Scientific Engineering Centre “BIOMASS” IETP NAS of Ukraine

Conclusions • National JI regulations allow Ukraine integrating into world carbon market • Use of Ukraine’s carbon potential through JI mechanism is quite far from optimal until now • All barriers can be removed if market players better understand each other and make steps forward • For consulting services, and additional information please visit: www. biomass. kiev. ua Scientific Engineering Centre “BIOMASS” IETP NAS of Ukraine